Inflation: the enemy of savings
It’s the invisible tax!
We’ve all heard the big thinkers in government and central banks talk about inflation targets as if they have some sort of goal in mind, they talk like they know what their doing, and they’d like us to believe they do, and it’s “normal” and even that it’s “good”
But what is inflation?
According to research:
In economics, inflation is a general rise in the price level of an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.
Does that sound like something that’s good to you?
If your someone who makes an effort to have a savings account of some sort it shouldn’t!
Essentially, inflation makes you poorer over time, it’s like an invisible tax that keeps eating away at your money every year.
Many of us will think, “well it’s always been that way, inflation is just something that occurs naturally, it’s just the way it is”,
“ 2.5%, 3% or even 5% is a small number, it doesn’t really affect my life at all”.
Firstly, we need to understand how any and all inflation affects us personally.
It might not seem like it matters that much if a cup of coffee or a dozen eggs goes up slightly every so often, but it does matter and it costs you big time!
Isn’t a loaf of bread or a dozen eggs about the same in quality and size regardless of its price increases over time? Did the price go up because the quality of the same brand loaf of bread is continually getting better?
Did a dozen eggs used to be fewer eggs than a dozen eggs today? Are the eggs today bigger? Or somehow better than they were before thereby justifying the continues price increase?
Is a house that cost $20,000 in 1970 somehow much more improved and arguably better if it cost $200,000 in 2021? Sure, the kitchens probably been updated, and it’s been repainted several times at least, but Isn’t it really just the same house?
So then what really happened?
Did the value really go up? Or did the purchasing power of your money go down? (And maybe the value of the product went up just a little bit)
Basically in an oversimplified way, things keep costing more because the money that you use to pay for them keeps losing its value, little by little and year by year, 2% 3% or 5% every single year, and it doesn’t take long before that’s a really big problem.
Look at it this way;
If you have $1,000 in a savings account for one year at .1% interest you’ll get $1 in interest for the year, but at the same time if inflation is running at 5% for the year, then your 1,000 is worth 5% less than a year ago, it’s now only worth $950 (plus the $1 you got in interest) so you now have $951 in purchasing power at the end of the year instead of your $1,000
Or as given in the example below
You can see where this is going can’t you, at 5% inflation it will take less than 10 years for you to loose half your money!
Or if your looking more long term and save for retirement, say 20-30-40 years down the road, any inflation at all will completely destroy your savings!
If inflation for the year is 5% you’ll need to make sure your savings is giving you a minimum 5% interest just to stay afloat with the same amount of money (in purchasing power)
Or If you expect to have any gains at all from your savings, you’ll need to have your gains be higher than the current rates of inflation.
Who knows of a savings account that pays anything close to the current rates of inflation?
Find out next time…….